QE Drive

Market trends

What happens when the QE drive runs out of fuel?

This week the market broke, in the downward direction, out of a month long coil.

We made a lower weekly high and lower weekly low. So on a weekly time frame, the trend has changed to down. We are one time framing down.

October also broke the September low. So if October ends anywhere below 2188 in the SPX, we will also be one time framing down on the monthly chart.

2016 already made a lower low than 2015, and it also made a higher high. So we have a megaphone image on a yearly chart.

As discussed earlier, since 2014 the market has been characterized by whippy action on various time frames. Down moves fail to continue down and get negated by up moves. Up moves cannot make a new trend up, and get sold back down.

This creates the megaphone pattern, indicative of confusion, and often signaling a trend change.

Where do we go next? And why is this happening?

Where

The market is still in a bullish posture anywhere above the midline of this range. Which, conveniently, is located at 2000.

If the market breaks and holds below 2100, it would enter that 2000-2100 range, and the 80% rule would take it to 2000. If we fell to 2000, a bounce would not be unexpected.

If 2000 held, then the range high of 2100 would be critical, since it might form the shoulder of a head and shoulders pattern.

2 ways to continue the up trend. Hold above 2100…or, fall to 2000, bounce, then break and hold above 2100, and the up-trend could continue.

A way to get lower: getting stuck under 2100, and later breaking below 2000, and we’d next target the bottom of the range, around 1800.

It’s pretty clear and easy to read.

Why?

Short answer: central banking driven markets.

The run up in this market has been driven by money printing.

How does the QE drive work?

Refresher course. The private central banks known as “the fed” print money, and stick it in their vaults (#s on computers). It is potential money at that point. It must be borrowed in to existence, in order to enter the economy. They lower rates to stimulate this borrowing.

Those with access to “credit” borrow this money. The biggest easiest borrower is the government.

But we can see from charts of stocks and bonds, that much of this borrowed money, was used to buy stocks and bonds.

It may have spent a round paying government employees, and facilitated transactions in business. But sooner or later, or sooner, someone got ahold of it, and used it to “invest.”

So markets went up.

Here are the 30 year notes.

The action there is worth some thought. But let’s come back to that later.

Let’s stick to the question of what effect central banking will have on the stock market.

So what happens when QE ends?

For one thing, it has not ended in Europe. So money is still being created and added to bank vaults.

All those confusion whips and reversals since 2014 have been based on any hint that the Fed will raise rates.

The trouble has been finding entities with credit (businesses, individuals, governments) willing to borrow enough of this money in to the economy, to keep it growing. And then to keep it flowing in to stocks.

When the amount of money that can be lended in to existence balances out against the amount of money that disappears from existence through default, then the economy flattens out. And we see that in the chart since 2014.

If the amount of money that disappears through default exceeds the amount that can be lended in to the economy, then we get deflation, recession, and the chart would presumably trend down.

That’s why the market freaks out every time the Fed suggests raising borrowing rates, even by some anemic amount.

What’s up with those bonds?

At the end of 2008, when QE was announced, and interest rates were slashed, the first reaction in bonds was a dramatic devaluation that lasted 6 months.

Interest rates slid from 5% to 0% through this exact time frame. So new bonds yielded less and less return, until they yielded nearly nothing.

Old bonds, that still had a yield, should have been more and more valuable. But bond prices crashed. Why? I don’t know. Gotta think it through.

The government was on a bond buying spree. Whenever the government was buying its own bonds, it depressed the price of bonds.

The value of bonds popped when the government stopped its purchase programs, such as between June and August of 2010, and June-Nov of 2011.

I’m just going to post this, mid-stream in thought. Later I will continue the exercise.

If anyone reads this and wants to enlighten me, I’m all ears, and eyes.